What Just Happened Also Occurred Before The Last 7 U.S. Recessions
July 4, 2019 10:30 AM   Subscribe

Reason to Worry? (SL NPR)

"Consumers could see the data point as a red flag and pull back on spending, or corporations may view the sloping yield curve and decide not to make investments or hire new employees."
posted by Caduceus (53 comments total) 26 users marked this as a favorite
 
Via my Dad. Thanks, Dad! Like I needed more to worry about!
posted by Caduceus at 10:31 AM on July 4, 2019 [14 favorites]


Fed just drops interbank interest rates a few percentage points, golden.


wait, see what I did there, buy gold buy gold by by gold
posted by sammyo at 10:42 AM on July 4, 2019 [4 favorites]


We're about due for a correction, in the general business cycle sense, and I'm pretty convinced that the economy is going to predict the winner of the next election. So if we're going to have a recession in the near-to-mid-term anyway, we may as well have one that provides the benefit of getting Trump out of office in addition to the carnage it inflicts.
posted by kdar at 10:46 AM on July 4, 2019 [28 favorites]


What does the signal mean, though? Why does the short-term interest rate go higher than the long-term interest rate before a recession? And why does it seem to go back down either right before or during each recession?
posted by clawsoon at 10:47 AM on July 4, 2019


Worrying, yes, but the term "yield curve" has been trending for the past year or so.

In other words, a recession is bound to happen at some point, and the US is, technically speaking, overdue for one based on historical patterns. Hopefully it won't be as bad as the one that started in 2007/08, or another brutal recession that started in 1989 and peaked (in terms of job losses) in the US in 1992.

That particular downturn last until at least 1996 in Canada. A terrible decade if you were a Gen Xer attempting to enter the workforce. This dark time has been mostly forgotten, since the Boomers writing the news for the past decade have been rightfully focused on the travails of their wee ones, the Millennials, post- Financial Crisis.

But brutal times seem to be cyclical. Most people have probably forgotten about the terrible recession of the early 1980s, for example.
posted by JamesBay at 10:48 AM on July 4, 2019 [9 favorites]


The endless cycle of boom and bust inherent to capitalism is just great, thanks.
posted by GenjiandProust at 10:52 AM on July 4, 2019 [16 favorites]


If it takes a recession to get Trump and the Republicans out of office, I'm 100% in favor of one.
posted by still_wears_a_hat at 10:54 AM on July 4, 2019 [2 favorites]


It takes politics to get Trump out of the WH. It takes a job for me to provide for my kids.
posted by JamesBay at 10:55 AM on July 4, 2019 [51 favorites]


Call me a doubter, but consumers paying attention to an inverted yield curve when considering whether to spend or not seems like a wee bit of a stretch considering how little consumers pay attention to anything save their own immediate situation. That isn't to say I think there isn't reason for concern, I suspect strongly there is and that we may well be headed towards some sort of financial crisis, but consumer concerns aren't really focused on arcane financial indicators.

I'm not so sure though that there isn't some fear among financial firms of what losing Trump will mean for them and they might well be looking to a future Warren/Sanders/Harris presidency and feeling things might not be quite so rosy for them as they are now with the idiot in charge. The tension between what's best for long term interests and those who hope to profit really aren't all that well aligned in the current system, as I guess is pretty obvious so may not have needed stating now that I think of it.
posted by gusottertrout at 10:55 AM on July 4, 2019 [6 favorites]


If it takes a recession to get Trump and the Republicans out of office

A bad recession might make some people more receptive to Trump's anti immigrant stance. It also increases suicides and domestic abuse and make it harder for people to retire 10 or 20 years from now. Let's hope we don't have one.
posted by Bee'sWing at 11:09 AM on July 4, 2019 [42 favorites]


Less concerned about consumers, more concerned about what Individual 1 will do to try to manipulate the market and make bad short term decisions to try to avoid recession before the election. History shows that corrupt politicians go to great, immoral lengths to stay in power.

From the article: "This is an important piece of information. It helps people plan," Harvey said. "It enhances the possibility that we have a soft landing, not a hard landing, like a global financial crisis."

Yesterday, there was news about potentially installing a crackpot gold- standard nut to the Fed. If this happens, and Cheeto gets reelected, she would be one step away from taking Jerome Powell's seat as Fed chair. The market has been behaving irrationally for years now, and shady decisions have shown to lead to disastrous financial crises that could be mitigated under the leadership of stronger minds.
posted by hampanda at 11:13 AM on July 4, 2019 [4 favorites]


Well, whatever American consumers are paying attention to, 40% believe that a recession has either already started or that it will in the next year... and one third have decided to reduce their spending this year.

Which ties into the potential that people believing a recession is imminent can actually contribute to a recession happening.

Of course, American consumers might also be paying attention to any number of troubling signs that an economic downturn is right around the corner (or already here).
posted by overglow at 11:23 AM on July 4, 2019 [4 favorites]


A bad recession might make some people more receptive to Trump's anti immigrant stance.

Nah, that's not how presidential elections work. Then again, we are talking about Trump, so who knows.
posted by Automocar at 11:24 AM on July 4, 2019 [1 favorite]


Climate change is causing climate refugees is causing resentment of immigrants around the world. It is a new thing. It has led to the rise of right wing troglodytes like Trump and Boris and Viktor Orbán and Marine Le Pen around the world. I think it is going to be one of the main themes of politics in the next 50 years.
posted by Bee'sWing at 11:33 AM on July 4, 2019 [9 favorites]


I didn’t realize the last recession ended, tbh.
posted by rodlymight at 11:38 AM on July 4, 2019 [44 favorites]


What sammyo said - buy gold (not BTC). The chart looks good for the first time in 5 years, and gold should rise if rates/yields fall and the supply of money expands. Nobody cares about gold until everyone does, all at once.

The expectation of recession is why, in part, the fed and other global central banks have been raising rates/rolling back QE (somewhat). There's now an expectation of a rate cut (25bps, possibly 50bps) in the near term, with potential for more, as well as a resumption of QE in order to soften the impact.

For consumers, the biggest question probably revolves around housing. If you (can) wait a few quarters, you may be able to get a dramatically cheaper mortgage for starters, possibly even a cheaper property (depending, etc etc).
posted by Mirax at 11:46 AM on July 4, 2019 [1 favorite]


What does the signal mean, though? Why does the short-term interest rate go higher than the long-term interest rate before a recession?

A yield curve tells you the price of borrowing money for various lengths of time. This price is based on a lot of factors, a key factor being the duration of the loan. One way to look at it is that normally risk increases with the duration of the loan and this increased risk is reflected in a higher interest rate.

So under normal circumstances, you would expect the yield curve to gradually slope upward (with the exception of very short term loans). But if there is a perception that risk will increase in the short/medium term, then this will raise short/medium term interest rates, and the yield curve changes shape: it flattens or inverts.
posted by dmh at 11:59 AM on July 4, 2019 [6 favorites]


The American people no longer have the skills necessary to be self-reliant. We've lost generations of tool & die makers, factory floor designers, and every form of skilled tradesmen.
In announcing his move of the manufacture of the last Macs from San Antonio to China, Tim Cook said it was because corporate America couldn't figure out how to make enough custom screws to meet Apple's needs. He picked China not because their labor is cheap, but because it is highly-skilled, unlike American labor. And they know how to make stuff in mass. We don't.
I used to focus on buying American. I refuse to now. It's trash. I buy German, Japanese and Chinese.
posted by robbyrobs at 12:00 PM on July 4, 2019 [10 favorites]


But why are we due for a correction? Why is a recession bound to happen? Just because it's happened before? I feel like this is a self-fulfilling prophecy that isn't really rooted in anything solid - the economy is an enormous chaotic system and I'm skeptical that anyone really understands what's happening. I also think that economics is pure witchcraft. Inspecting the entrails of sacrificed sheep would probably be more accurate.
posted by catcafe at 12:25 PM on July 4, 2019 [3 favorites]


Reason to Worry?

Thanks, I’m good
posted by Going To Maine at 12:29 PM on July 4, 2019 [10 favorites]


Yield curve is an epiphenomenon not a core driver of economic downturns.


https://fred.stlouisfed.org/graph/?g=ojZS

Shows consumer debt / wages.

The 1990 recession, 2000 recession, and 2007 recession were largely due to consumer debt overextension.
posted by Heywood Mogroot III at 1:00 PM on July 4, 2019 [2 favorites]


https://fred.stlouisfed.org/graph/?g=ojZX

Is another view, annual consumer debt take on / wages showing the immense excursion from historical levels we saw during the Bush Boom years, when housing bubble gains were percolating out into the wider economy.

My general thesis about the economy is that we’ve got 5 to 10 more years of good times, as I think the boomer retirement, elder care, and die off were just entering into now will be very stimulative and good for wage inflation.
posted by Heywood Mogroot III at 1:11 PM on July 4, 2019 [2 favorites]


What does the signal mean, though? Why does the short-term interest rate go higher than the long-term interest rate before a recession?


Normal times:
Long loan: You're tying up our money in one thing for a long time, and there's a (systemic, big-picture) risk associated with that because our money isn't as diversified. So we're only willing to do the loan for a relatively high rate.
Short loan: There's nothing bad on the horizon, so we're confident you'll make all the payments on your loan for a new dingus for making widgets. After your loan concludes, we'll just move the money into a new loan for something else. Because the risk over the longer haul is lower this way, we're willing to do the loan for a lower rate (or if we aren't, some other bank is).

Times like this:
Long loan: All the same stuff, but the longer term risks we're talking about here already have the big, systemic risk of recessions baked in.
Short loan: We're pretty concerned that if we lend Acme Co a million smackers so they can buy a new widget dingus, the widget business might tank in a year or two and then they won't make their payments and we gotta do all that annoying bankruptcy shit at them. So we're gonna charge more for the short-term loan than for the long-term loan.

consumers paying attention to an inverted yield curve when considering whether to spend

It also makes it more expensive for Acme to buy their new widget dingus, or maybe they just can't buy it.
posted by GCU Sweet and Full of Grace at 1:13 PM on July 4, 2019 [3 favorites]


I take for granted he'll crash the economy, but my worry is he'll crash the currency too.

That would be one Putin could cross off his bucket list.
posted by jamjam at 1:23 PM on July 4, 2019 [6 favorites]


If I was willing to put money on it I'd say collapse comes around October.
posted by The Whelk at 1:24 PM on July 4, 2019 [1 favorite]


Short term interest rates fuel a booming economy, the best economy ever, way better than Obama’s economy.

What’s really awesome is that the growth of medical expenditures, though slowing somewhat, is approaching the %of GDP sometime in the next few years where it is going to impact our ability to pay the interest on the national debt. Which means no more borrowing. And no more money to spend on any social services, education, military, government services, nothing. All of your and my taxes will go straight into the pockets of banks. The final “fuck you” from the baby boomers.

Then there’s the whole climate change deadline coming.

All of these things will require a serious, widespread comprehensive retooling of not just the economy, but how we do just about everything in our daily lives.

We do nothing, and we continue to slide into unrestricted capitalism with a completely symbolic government that exists to make flags and propaganda and field sports teams. And probably coordinate corporate activities so that we still have a functioning military. Maybe those of us who have jobs will have some basic level of our human needs met. If you have a choice, please consider working for the least evil company you can.

Or there’s massive upheaval, democratically elected or otherwise, and somehow a functioning democracy rises because people are sick of this shit and want things to work like they do in some of the “nice” countries in the world.

I think you can simultaneously prepare for both scenarios and (believe it or not) maintain some kind of hope. Take care of yourself, love your people, don’t be so fearful of the “other”, don’t be so damn materialistic.

But one thing’s for sure, gold and guns and fossil fuels ain’t gonna save you and are making shit worse.
posted by Slarty Bartfast at 1:27 PM on July 4, 2019 [12 favorites]


https://fred.stlouisfed.org/graph/?g=ok0eshows the two components of the yield curve...

The economy is path-dependent — past situations are different from today.

Main difference now in reality is the Fed pumped trillions of USD into the economy to resuscitate it and will do it again when needed.
posted by Heywood Mogroot III at 1:28 PM on July 4, 2019 [1 favorite]


Medical expenses do not disappear from the economy, they feed right back into wages.
posted by Heywood Mogroot III at 1:36 PM on July 4, 2019


What’s really awesome is that the growth of medical expenditures, though slowing somewhat, is approaching the %of GDP sometime in the next few years where it is going to impact our ability to pay the interest on the national debt.

Interest on the national debt as a percentage of GDP is near record low. It is half of what is was during the Reagan administration.
posted by JackFlash at 1:48 PM on July 4, 2019 [3 favorites]


Alright... how do I buy gold in the UK?
posted by ewan at 1:58 PM on July 4, 2019


If I was willing to put money on it I'd say collapse comes around October.
posted by The Whelk at 16:24 on July 4
[+] [!]


On the first Thursday after the first Monday in October, if my journals are correct. I kind of expected it last year, to tell the truth. We've been riding pretty high on the previous administration's attempts to resuscitate the economy, and the crutches have all been kicked out now.
posted by halfbuckaroo at 2:35 PM on July 4, 2019 [4 favorites]


The American people no longer have the skills necessary to be self-reliant. We've lost generations of tool & die makers, factory floor designers, and every form of skilled tradesmen.

Actually I work for a company that develops software for process engineering and factory line design. By making the factory line more efficient (i.e., designing it for humans) it makes the line more productive, which in turn increases margins, which in turn makes the factory more competitive, which in turn increases contracts and scale of contracts, which in turn increases jobs.

At least, that's what our customers, factory owners, tell us, and I see no reason to disbelieve them. Money talks, as they say, and they are buying our software.
posted by JamesBay at 3:01 PM on July 4, 2019 [3 favorites]


how do I buy gold in the UK?

Bullionvault.com - They hold physical gold in a choice of secure vaults.
posted by Lanark at 3:03 PM on July 4, 2019


Your link isn’t working JackFlash, but in 2018 it hit 390 billion and was 50% higher than 2017, surpassing what we spend on the military. US GDP was about 20 trillion dollars in 2018. Federal government expenditures on health care are currently about 18% of GDP (3.3 trillion per year) and rising by about 5-6% per year and have been doing so for about 2 decades, slowing once when managed care arrived and again after the ACA, but overall has been outpacing the US economic growth which has been about 3% over the last ten years or more. The federal government’s current tax revenue is 3.6 trillion which is why we borrow to pay for certain niceties like a military, a TSA, highways, food inspections, courts, etc.

So, 3.3 trillion dollars vs a 390 billion expense doesn’t seem like much of a comparison, right? Surely we can afford both things. The problem is, that those two numbers appear to be completely non-negotiable, like your rent and your food money. If you can’t pay both, not only do you not have money for anything else, but bad things happen when you stop paying those bills. Smart People have been doing everything they can to ratchet down hard on health care spending and we still have a system that excludes 20 million people and grows at 5% per year.

Most healthcare economists think that even assuming a GDP that continues growing propped up by low interest rates, once healthcare spending reaches 20% of GDP, currently projected to happen in the mid 2020s, we will no longer have enough to pay those two bills. And two things will happen. People and healthcare providers who depend on federal money will no longer get or provide health care, and we will start defaulting on our interest payments which means we will no longer be able to borrow money for our military, roads, or Air Force One’s fuel bills for weekend golf trips.

It’s true that healthcare is a huge segment of the economy, employing more than just about any other sector (possibly military + support or government itself + support exceptions), but by and large, healthcare doesn’t contribute to a lot of GDP growth because healthcare doesn’t have a “product” per se. Most dollars spent are caring for the elderly, chronically infirm, and disabled and only a minority patching people up who are going back into the work force. Pharma and innovation for export are an exception but they are exporting to countries where the healthcare economy is much more tightly regulated and spending is much less, so it’s mostly us that’s spending that money, creating a zero sum.
posted by Slarty Bartfast at 3:13 PM on July 4, 2019 [4 favorites]


Here is a corrected link: Interest on the national debt as a percentage of GDP As you can see, there was a much higher burden of interest during the Reagan administration, nearly twice as large, and the sky did not fall. So this interest burden talk is needless fearmongering.

And then you get into comparing healthcare spending of $3.3 trillion with the interest burden $0.39 trillion. But this doesn't make any sense. The federal government only pays for 28% of that $3.3 trillion in healthcare. Consumers, employers, and states pay the rest. Why link interest the federal government pays with healthcare spending most of which the government doesn't pay?

Then you say "healthcare doesn’t contribute to a lot of GDP growth because healthcare doesn’t have a “product” per se". But this is just nonsense. Do you know what GDP is? Healthcare spending most certainly is part of GDP, a product. You even said it yourself above. And it is a fast growing component of GDP.

So I just don't know where you are going with this, since you seem to have so many economic misconceptions. One point you might be making, which is true, is that the U.S. overpays for healthcare - almost twice that of other countries - and this is a real problem. Interest on the debt is not.
posted by JackFlash at 3:52 PM on July 4, 2019 [1 favorite]


So we borrow money to pay for an expenditure that’s rising faster than we possibly pay for. Doesn’t that create an exponential rise in the debt? I guess my point is that we seem to be devaluing our currency for short term gain at a rate that can’t work out given the current priorities in the budget. I think it’s unlikely we can turbo boost the economy out of this situation. Something has to give but there’s no sign of that happening and widespread economic pain probably won’t help.

I’m not a health care economist yet, but I’m about halfway through my degree after 20+ years in healthcare. Hopefully I know something, but it *is* really complicated, who knew?
posted by Slarty Bartfast at 4:04 PM on July 4, 2019 [1 favorite]


I guess my point is that we seem to be devaluing our currency for short term gain at a rate that can’t work out given the current priorities in the budget.

Devaluing our currency? Perhaps you haven't noticed but the U.S. has had record low interest rates, certainly not the sign of a devalued currency, and record low inflation, also not a sign of a devalued currency. In fact, it is just the opposite, the strength of the U.S. currency has been detrimental to U.S. exports and a major cause of the loss of millions of manufacturing jobs. A weakened currency would be a big bonus to U.S. manufacturing workers, but we have had just the opposite.
posted by JackFlash at 4:17 PM on July 4, 2019


Sorry, didn't mean to jump on you. I'm sure you have good intentions. But unfortunately you are mashing up a lot of fearmongering that the Very Serious Pundits have been malignantly pushing for years. This stuff is prevalent in the New York Times and Washington Post so I'm not surprised that you have seen a lot of it.

But I agree with you that healthcare spending is a big problem. And the biggest part of the problem is that people in the U.S. just pay too much for the healthcare services they are getting, almost twice as much as the rest of the developed world. Americans aren't getting more or better healthcare. They are just paying twice as much for the amount of healthcare they are getting.
posted by JackFlash at 4:29 PM on July 4, 2019 [3 favorites]


Labor market hasn't been this tight since 2000:

https://fred.stlouisfed.org/graph/?g=ok2j

The Fed showed in 2009-2012 that "money" is not a constraint in the economy any more. Having lived in Japan, I've seen this movie before:

https://fred.stlouisfed.org/graph/?g=ok2l

shows a $3.7T monetary injection of new money into the economy then...

The core constraint on the economy is the money flows OUT of the 80% of the country who are living paycheck to paycheck.

I saw the 2007 recession coming from a mile away due to its linkage with the housing bubble, but I think the 2001, 1990, and earlier recessions were mostly just the Fed f---ing with us; speaking of which, here is the weekly initial claims / total employed:

https://fred.stlouisfed.org/graph/?g=ok2p

this shows that at its worst, the 1982 recession 0.7% of the population was getting fired EVERY WEEK, at which rate EVERYONE would be fired in under 3 more years.

But anyhoo, look how low that graph is now. Historically low! What's going to change it?

We're no longer living in the quasi-hard money times of the 70s, when the Fed was able and willing to throw millions out of work to fight the wage-price spiral (now that manufacturing is no longer 20%+ of the economy there's much less wage pressure overall.

Same graph with health workers added:

https://fred.stlouisfed.org/graph/?g=ok2u

National debt may or may not be a "problem". Japan has been printing its way to 200% debt-to-GDP, who says we can't do the same??

https://fred.stlouisfed.org/graph/?g=ok2v

^Japan's debt to ours
posted by Heywood Mogroot III at 5:17 PM on July 4, 2019 [1 favorite]


Hokay, one more FRED graph:

https://fred.stlouisfed.org/graph/?g=ok2x

blue is annual consumer debt take-on as % of total wages.

Yeah, 2002-2006 was "extra-special", where just a little bit of Fed tightening (red graph) starting in 2004 knocked the whole thing down.

The pattern of interest rate rises matches up really good with prior recessions back to the 1950s.

Inflation was the Fed's bug-a-boo until 2006. $3.7T of monetary policy earlier this decade has pretty much killed that fear now . . . too much of the country is too broke to push up prices 15% like the Carter-era inflation.

Now, the fly in the apple sauce to me is:

https://www.bea.gov/news/2019/us-international-investment-position-1st-quarter-2019-year-2018-and-annual-update

Even though Krugman says otherwise, this is clearly a graph of a country going down the poop appliance.
posted by Heywood Mogroot III at 5:35 PM on July 4, 2019 [1 favorite]


I haven't really seen a satisfactory explanation in this thread for the inverted yield curve so I'm going to give it a try.

People are providing macroeconomic explanations related to when businesses need to borrow money, but it's not about that. It's strictly about how investors and money managers see the market.

Basically, investors think the stock market is like to drop (or crash) in the near term (the next 2-3 years), so they switch the money they manage over to longer-term bonds, which provide a stable, guaranteed, if unsexy rate of return.

Like anything, bonds are subject to the laws of supply and demand. All that demand for longer term bonds drives down their interest rate (If I'm the gov't and lots of people are buying my bonds, I don't have to offer them a higher interest rate to get them to buy. I can lower the rate and still sell the bonds, reducing my borrowing costs).

It's not an indication that a recession IS coming. Nor is it a precipitating event for a recession. It is solely an indicator that investors think the stock market is likely to drop in the short-to-medium term.
posted by dry white toast at 6:38 PM on July 4, 2019 [3 favorites]


Your link isn’t working JackFlash, but in 2018 it hit 390 billion and was 50% higher than 2017, surpassing what we spend on the military. US GDP was about 20 trillion dollars in 2018. Federal government expenditures on health care are currently about 18% of GDP (3.3 trillion per year) and rising by about 5-6% per year and have been doing so for about 2 decades, slowing once when managed care arrived and again after the ACA, but overall has been outpacing the US economic growth which has been about 3% over the last ten years or more.

Slarty Bartfast, I was going to write a longer response, but could you review this chart of federal expenditures from 2018. A number of your facts are wrong, such as "surpassing the military" (defense is given as $623B here). And in the context of the federal government, why are you not referring to the expenditures for Medicaid+Medicare, which are not 3.3 trillion? That number is almost the whole 2018 budget.

OK, part of the longer response:... Moreover, larger expenses have no relationship with "ability to pay" unless the bond market loses confidence in US bonds or Congress doesn't raise the debt ceiling. The government already doesn't have an "ability to fund", with the ridiculous tax cuts and low corporate contributions. That stuff should have made US treasury bonds less attractive (in principle), but of course as long as the current financial power structure persists, "no one" cares about marginally larger deficits every year. The US federal debt has doubled in a decade: do my "no ones" care yet? It seems not.
posted by sylvanshine at 10:16 PM on July 4, 2019


Too bad Mutant is MIA.
posted by Daddy-O at 11:16 PM on July 4, 2019 [4 favorites]


Hiring rebounds in June, easing fears of a U.S. recession (Heather Long, WaPo)
The strong numbers exceeded analysts’ expectations of 162,000 jobs in June and represent a significant rebound from the meager 72,000 positions added in May, which sparked off fears that the economy might be losing momentum.

“Recession concerns are overblown,” said Gus Faucher, chief economist at PNC Financial Services. “There’s no indication the labor market is in trouble or the broader U.S. economy.”
posted by Johnny Wallflower at 8:15 AM on July 5, 2019


So, I know that econ is barely a science, and as such it's easy to fall into chart-and-indicator voodoo, but one thing nobody's been able to tell me is what would be the actual mechanism of a near-term recession, if one is indeed imminent. So far as I can tell, all of the recent-ish recessions had some sort of concrete mechanism that actually caused things to go belly-up. Again, not an economist (just some dude who listens to a buncha podcasts) but this is sorta my impression of what drove some recent recessions :

1970s : energy price shocks, inflation, Middle Eastern wars/politics, deindustrialization
Early 1980s : interest rates
Early 1990s : deindustrialization, globalization picking up steam, corporate downsizing driven by productivity growth, ...? (I was really young then, so I actually don't know much about this one)
Early 2000s : tech bubble bursting
Late 2000s : real estate bubble bursting
Now : ?????

I work in tech, so of course every January since 2013 there's been a spate of articles predicting the imminent bursting of the tech bubble, and while there are certainly a number of high-profile overvaluations (cough uber cough cough), I'm not sure I'm convinced. Tech still seems like a good place to put your money. Still, even if there is a tech bubble and it does burst, maybe that won't be so bad? I mean, the early 2000s recession was shitty for me since I graduated around then, but I mean it lasted what, 3-4 years? And then after that investors got a little smarter (less dumb money) and workers got a bit smarter, too (no more options in lieu of salary). I mean any recession is terrible, but the 2001 tech crash was nothing compared to the 2008/2009 wipeout.

Again though, I'm not an economist, and I don't know a whole lot about economic sectors outside of tech. What looks worrying out there on the ground right now?
posted by panama joe at 8:27 AM on July 5, 2019


1990s was a debt recession, crashing oil prices exposed a lot of bad lending, leading into the “S&L Crisis”.

The late 70s economy was actually VERY strong as 4 million boomers a year were flooding into the workforce; the decade as a whole saw 20M jobs added, the same as the 80s and 90s from a smaller base.

It’s my thesis that as these boomers (and increasingly two-income boomer households) had zero debt and a large capacity to borrow they began to stress the capital markets.

Nixon only took the USD fully off the gold standard in ‘71 and there was a lot of adjustment to be made to the new macro realities.

https://fred.stlouisfed.org/series/CP

Shows corporate profits were pretty flat coming into the 2001 recession, the stock market crash was an adjustment to P/E realities.
posted by Heywood Mogroot III at 8:45 AM on July 5, 2019 [1 favorite]


The late 70s economy was actually VERY strong as 4 million boomers a year were flooding into the workforce; the decade as a whole saw 20M jobs added, the same as the 80s and 90s from a smaller base.

But what about stagflation, though? Or was it not as bad as it’s been made out to be?
posted by panama joe at 8:51 AM on July 5, 2019


Stagflation was mainly a story about supply shocks - the oil embargoes of the 70s. The first in 1973 was in retaliation for western interference in the Yom Kippur War. The second in 1979 was as a result of U.S. interference in the Iranian Revolution.

These were extreme cases. Overnight in 1973 gasoline prices doubled, the equivalent of today going from $4 a gallon to $8 a gallon. And again in 1979 doubling the equivalent from $8 a gallon to $16 a gallon. Almost overnight. These sudden cost increases put a brake on the economy as consumers and manufactures had less money to spend.

Traditionally, economists believed that monetary policy could fix an economic slowdown by lowering interest rates and flooding banks with printed money. But in this unusual circumstance in which production was limited by a resource constraint, all the extra monetary stimulation did was increase inflation.

But conservative economists took the wrong lesson from this episode. They turned the stagflation caused by the oil embargoes (which not incidentally was caused by U.S. sticking its nose in Middle East affairs) and perversely turned it into a morality play in which they declared U.S. consumers to be the villains who needed to be punished.

So entered Fed Chair Paul Volcker who raised the federal funds rate to 20% !! in an effort to "break the back of inflation" which he did by breaking the backs of millions of workers he put out of a job. This brutality resulted in the worst post-WWII recession in history previous to the Great Recession of 2008, ruining millions households. And it was deliberated caused by Paul Volcker.

But this morality play was all wrong. It wasn't greedy consumers or government spending which caused inflation and needed to be punished. It was a simple supply shock caused by the oil embargoes. The same inflation was seen in countries around the world due to the oil shortage. And the inflation eventually faded in countries around the world as the embargoes and oil shortages faded. And these countries did it without a brutal Paul Volcker induced recession.

Rapid inflation during the 1970s was disconcerting, but in real terms, workers did quite well because their wages increased along with inflation. That is right up until Volcker pulled the rug out from under them.
posted by JackFlash at 9:56 AM on July 5, 2019 [4 favorites]


And economist Dean Baker makes the argument that stagflation wasn't even as bad as reported at the time. It turns out that there was a quirk in the way CPI was calculated up until 1982. Housing costs in the CPI were calculated by the cost of buying a home, which included mortgages costs. As interest rates increased, the cost of mortgages and therefore the calculated CPI also increased. This exaggerated the measured CPI by as much as 2%. Today the CPI uses cost of rents to compute housing, which is less subject mismeasurement due to the vagaries of mortgage rates.
posted by JackFlash at 9:57 AM on July 5, 2019 [2 favorites]


borrowers on fixed rate mortgages also made out like bandits in the 70s

https://fred.stlouisfed.org/graph/?g=oko3

Of all the FRED charts I’ve made that’s my favorite, total debt to GDP.

There’s a story there, yaknow?
posted by Heywood Mogroot III at 11:49 AM on July 5, 2019 [1 favorite]


Housing also shot up in the 70s thanks to increasing two-income households and the Equal Credit Opportunity Act in late 1974 forbidding banks from discounting the wife’s income when calculating household DTI...

Plus those millions of boomers hitting their 30s, too. First one arrived in 1976!
posted by Heywood Mogroot III at 11:52 AM on July 5, 2019 [1 favorite]


Stagflation:

https://fred.stlouisfed.org/graph/?g=okpd

Was a thing in the 70s but two-income households could deal with it fine:

https://fred.stlouisfed.org/series/LNS11300002
posted by Heywood Mogroot III at 12:38 PM on July 5, 2019 [2 favorites]


What’s really happened over the past 10-years is central banks printed lots of lots of money and pumped it into the financial system through QE [Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment.] What happened to that money? Well, most of it stayed in the system, and has been invested in financial assets – NOT the real economy. And that is where the money continues to reside – QE has inflated the value of all financial assets by boosting bond prices via dangerously low rates and converting equity into debt (thus pushing up equity prices through buybacks). And, of course, markets have spotted and coat-tailed the effect… meaning the banks and hedge funds and owners have received lots of dividends and bonuses while workers have seen wages stagnate/fall and workers rights reduced in the new gig economy.

Long-term its unsustainable. But why would the party ever end? Because no one is going to get paid a pension from negative yields to infinity. And politicians and voters notice the rich getting richer while western economies flatline as the financial party goes on and on and on. Resentment is a terrible thing to behold – parliaments and corporate princes’ palaces will burn fiercely.
So, there you are, the stark binary choice. Its your/our choice pick one:
Central Banks take the medicine now and steer the global economy back to normalization, which means a sharply corrective stock market crash followed by recovery, rising rates (and a bond market wobble). 5 more years of pain! Then everything back to normal.
Or
They keep fueling the bubble, till its negative infinity rates and financial inflation means a single Tesla share is worth more than California… And the resentment is such the real world explodes and it all ends very badly.. Loads more pain for longer..
posted by robbyrobs at 4:52 PM on July 6, 2019 [1 favorite]


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